Project Analysis Example 1





Kerry Back

Example

  • Project requires $10 million purchase of 5-year MACRS equipment. Depreciation rates are 20%, 32%, 19.2%, 11.52%, 11.52% and 5.76%.
  • Anticipate equipment could be sold for $3 million at end of year 5.
  • Project sales revenue of $6, $10, $12, $10, and $5 million

  • Cost of goods sold (materials + labor) = 50% of sales
  • Initial working capital of $0.5 million (inventory), thereafter 20% of COGS, but 0 in year 5
  • Selling, general & administrative expenses of $2, $2, $1, $1, and $1 million
  • Corporate tax rate (state + federal) is 30%
  • Discount rate is 10%